You will be able to compare how costs – including often-camouflaged costs such as early termination penalties and forfeited loyalty bonuses – affect different financial products when a new cost-comparison standard is implemented later this year.

The effective annual cost (EAC) will be introduced by the financial industry body, the Association for Savings & Investment SA (Asisa). All Asisa members will have to have the standard in place by October.

Currently, it is virtually impossible to compare costs between collective investment schemes (unit trust funds and exchange traded funds) and life assurance products.

The collective investment scheme industry uses the total expense ratio as a measure of investment costs, while the life assurance industry uses the reduction in yield (RiY). The RiY shows the effect of costs as an erosion of value, or a reduction in the annual yield or return over a fixed term. Neither measure fully discloses all the potential costs, and the RiY uses assumptions that could prove to be incorrect.

Investors and financial advisers have been demanding greater transparency on costs so that investors can make more informed decisions.

The new standard will provide more details of the penalties that life assurance companies impose if you do not maintain your contributions or premiums until the contracted maturity date.

According to Asisa, the standard will disclose all the early termination charges, penalties and forfeited loyalty bonuses that apply if you terminate your investment and withdraw your funds before maturity.

The EAC will detail the outcomes of the different combinations for one year, three years, five years and term to maturity.

Until now there has been very little disclosure of how penalties affect your investment, apart from a fine-print warning in policy documents that a penalty will apply if you do not maintain your premiums or contributions until the end of a contracted period.

At one stage, the penalties were as high as 100 percent of your accumulated savings. The penalties have gradually been reduced since 2005, when then finance minister Trevor Manuel and the life industry reached an agreement that the penalties must be limited.

The agreement was amended in 2008 to limit the penalties on life assurance retirement annuity (RA) products sold before January 1, 2009 to 30 percent and to reduce the penalties on RAs sold after January 1, 2009 to 15 percent. The changes also limited the penalties on life assurance endowment policies sold before January 1, 2009 to 40 percent and on those sold after that date to 20 percent.

The penalties are scheduled to be scrapped altogether when the proposed Retail Distribution Review is implemented.

In anticipation of the penalties being banned, life assurance companies have introduced loyalty bonuses, which are paid on maturity if investors remain invested for a predetermined period.

However, National Treasury is not entirely happy with loyalty bonuses, particularly for retirement products. For example, in proposals published last year on default investment options for retirement fund members, National Treasury stated that “loyalty bonuses, or any similar arrangement, are not permitted as part of the default investment portfolio”.

The regulators have subsequently indicated that they may not ban loyalty bonuses completely, provided they meet certain requirements.

Jonathan Dixon, the deputy chief executive in charge of long- and short-term insurance at the Financial Services Board, says the current thinking is that it may be necessary only to limit loyalty bonuses, so that the cross-subsidisation between policyholders is not extensive.

He says including loyalty bonuses in investment products could be a concern in terms of Treating Customers Fairly, because, in some ways, they are the flipside of early termination penalties.

However, Dixon says the advantage of loyalty bonuses is that they are more transparent than termination penalties. Generally, he says, financial advisers will punt loyalty bonuses to their clients as an added benefit, whereas they avoid telling you about early termination penalties.

Dixon says the disclosure in the EAC of the impact of penalties and forfeited loyalty bonuses on an investment is a positive move, because it should enable investors to have a better grasp of the costs of early termination.